Solvency Management and Financial Sustainability of Supermarkets in Kenya

Simon Peter Ochieng’ Odhiambo Lecturer, School of Business and Economics, Laikipia University sarahdolo@yahoo.com

Phineas Muriira Kobia

Part-time Lecturer, School of Business, Jomo Kenyatta University of Agriculture and Technology finkobia@gmail.com

Abstract: Supermarkets are vital drivers of the Kenyan Economy. However, lack of effective solvency management and cash flow challenges have deterred financial sustainability among supermarkets and left them on the brink of collapse. This paper investigated the influence of solvency management on the financial sustainability of supermarkets in Kenya. The study specifically examined the effect of financial leverage, operating margins, and firm size on supermarkets’ financial sustainability. The cash flow theory guided the study. The paper was a conceptual review and adopted a descriptive research design. It applied data from the empirical findings of studies related to solvency management and financial sustainability. Results revealed a significant relationship between solvency management and financial sustainability. It indicated that constructs of solvency management comprising financial leverage, operating margins, and firm size influence supermarkets’ financial sustainability in Kenya.

Key words: Solvency Management, Financial Leverage, Operating Margins, Firm Size, Financial Sustainability

1. Introduction

Solvency describes the organization’s ability to meet its long-term debts and other financial obligations (Navarro-Sarrión, 2016). Solvency is an important indicator and a measure of financial health as it is the ability of the company to manage operations in the long-run. The capacity of a corporate entity to meet its long-term financial commitments determines its financial sustainability. Batchimeg (2017) opined that solvency serves as a critical aspect of the overall business of supermarkets It generally describes supermarkets’ capability to meet their financial obligations in the long-run Supermarkets, like other organizations, are considered solvent when total assets exceed liabilities consistently. Kinuthia (2015) noted that supermarkets are systematically important entities worldwide, and it is evident that solvency is crucial for their financial sustainability and stability. Insolvency among supermarkets represents the risks of not having their own adequate funds to cover the eventual losses and other business uncertainties.

According to Navarro-Sarrion (2016), solvency management aims to ensure capital sufficiency for an organization from its own funds so as to absorb losses Furthermore, solvencymanagement focuses on controlling the degree of indebtedness through the requirement that the indicator of indebtedness will not fall below a certain minimum threshold. Insolvency in supermarkets appears as a result of the inability to settle debts and liabilities owed to the suppliers and other service providers (Kinuthia, 2015). Appropriate solvency levels are pursued to avoid the situation of bankruptcy. Effective solvency management usually represents the key to supermarkets' success and survival in dynamic and innovative retail markets. As such, it is paramount for supermarkets to maintain a balanced structure of assets that are weighted to the risk, and ensure a proper mix between equity and debt funds to sustain themselves in the long run (Shisia, Sang, Waitindi, & Okibo, 2014). The parameters of solvency management usually include; financial leverage, operating margins, and firm size.

Financial leverage is the utilization of debt funds to finance company operations and acquisitions of additional assets (Jati, 2019). The use of financial leverage amplifies the company’s returns. An increase in assets’ value leads to greater gains if the loan interest rates increase assets’ value. However, financial leverage has an inherent risk of bankruptcy. Financial leverage typically increases the minimum requirement of operating profits to meet the interest expense (Jati, 2019). If an